Is Ethiopia's economic growth just a veneer?

THOUGHT LEADERSHIP
Is Ethiopia's economic growth just a veneer?
Daniel Fikreyesus
Posted Thu, 20 Apr 2006

Since the mid 1990’s, it has been claimed that Ethiopia’s economic growth has been very good. BiA Online recently reported that this growth rate was confirmed by independent research (see Research confirms Ethiopia's high growth) done by the African Development Bank (ADB), the United Nations Development Programme (UNDP), and the World Food Programme (WFP). The Ethiopian government even recently claimed that in 20 years Ethiopia would be a middle-income country. Though the growth rate might actually be correct, it is important to note several other factors that are influencing the economic growth and its ability to positively influence poverty reduction.

Ethiopia’s economic growth has been noted to be a short-lived circumstance, caused by some positive shock and that its ability to sustain long-term growth is questionable. This is evident when looking at the World Bank report, which indicated that that 2003 economic growth was -3.7 percent. However, in 2004, it jumped to 13.4 percent. In less than one year the country bounded from severe recession to extraordinary growth.

This kind change undeniably happened because of some unexpected input rather than as a result of a planned and targeted growth policy. It is doubtful that this sort of growth will be sustained, unless changes in policy are made. Without long-term economic growth, as opposed to short-term shocks, it is unlikely that economic growth will bring any sustainable positive change.

Firstly, Ethiopia’s economic growth seems more driven by government spending than private saving, investment or export. Ethiopia is running a soaring trade deficit. In 2003 alone, while imports of goods and services was 37 percent of the GDP, export was less than half of that. In terms of volume, imports were at $1.6bn while exports were only $500mn.

Ethiopia’s trade and budget deficit is continuously increasing and without seriously addressing this issue, attaining economic growth is a futile effort. Many of the East Asian countries managed to sustain their economic growth through an export-led economy rather than ringing up massive debts.

Ethiopian central government expenditure on infrastructure in 2003 was close to 20 percent of the GDP. Thought infrastructure will definitely help to sustain growth in the future, it has also inflated the economic growth rate.

Moreover, Ethiopia is also an aid dependent country. Currently government expenditure and the budget deficient are covered by foreign aid. This cannot continue forever. In 2003 alone, Ethiopia received $1.5bn in aid or about 25 percent of the GDP.

One positive move has been the reduction of the military budget and the increase in educational expenditure. Ethiopia’s government expenditure in public education is 4.6 percent, which is equivalent to military expenditure. The military budget has been cut in half since 1999, when Ethiopia was in a war with Eritrea, and expenditure in public education increased by 1.2 percent since 1992.

There is a theoretical debate that economic growth is positively associated with poverty reduction. In fact, many developing countries in Latin America, Asia and Africa that have had long-term economic growth were able to reduce poverty.

However, the probability of economic growth reducing poverty is associated with several other factors too, such as inequality. Economic growth in a country with wide inequality is less likely to benefit the poor. On the contrary, the growth might actually widen the gap and that proportionally those who are well-off will benefit much more than the poor. Looking at the current economic and social inequality in Ethiopia, the regional disparity is widely visible.

The regions that are doing well, such as Addis Ababa and Harrai, are 2.5 times richer than places like Omo, Konso and Gambella. Other regional disparities are reflected by the fact that primary school enrolment is close to 80 percent in Addis and only about only 10 percent in Somali. Higher educational facilities are generally filled by students from urban areas such as Addis Ababa, Jimma and Dire Dawa while very few come from Gamella and Afar.

Infant mortally rate is 110 per thousand in Addis while it is more than double that in Afar and Gambela.

Leaving the regional inequalities aside, if we look at individual inequalities or the Gini coefficient, Ethiopia is doing as well as Canada and Austria. With a score of 30, Ethiopia is ranked 20th which suggest inequality it low.

However, this figure is as deceiving as the high rate of economic growth. Currently the top 20 percent of the population have control over close to 50 percent of the economy and thus proportionally benefit more from the growth than the rest of the poor.

Though recent economic growth was high, poverty has not declined much for years. For the last few years, a little over 40 percent of Ethiopia’s population live on less than a $1 a day and 80 percent on less than $2 a day. The fact that poverty has not declined with the high rate of economic growth shows two things: Either the economic growth is not benefiting the poor because it it not growing fast enough to offset inflation or the population is growing too fast for the growth to have any real affect.

In the years between 2002 and 2003 alone, the annual average change in consumer price index was 17 percent, which indicates that life is getting more expensive for an average Ethiopian and, based on United Nations report, 50 percent of Ethiopians cannot afford to spend enough to consume their daily minimum nutritional requirement.

Thus without mentioning the corresponding poverty situation, to talk about only economic growth does not give the full picture of Ethiopia's economy.

Looking at the overall economic and political condition of Ethiopia, the country is still missing several preconditions to sustainable growth such as high literacy rate, good democratic institutions, and openness to trade and governance. The adult literacy rate in Ethiopia is about 42 percent. Though this is relatively better than many Sub-Saharan African countries, it is still not good enough to influence or sustain strong economic growth. Political and administrative intuitions are also weak, making the country is vulnerable to political uprising, as happened in 2005. -BiA Online Daniel Fikreyesus wrote this opinion piece in his private capacity and his views are not necessarily reflective of the views held by BiA Online.